There are an estimated 4.5 million Personal Guarantees signed by company Directors in the UK alone. Since the recession it’s rare to find a lender that doesn’t ask for a Personal Guarantee if they are extending facilities to a limited company. Most Directors are reluctant to sign Personal Guarantees for the simple reason that if everything were to go wrong the likelihood of losing their home is amongst their greatest fears.
Accompanying the Personal Guarantee is normally a request to seek independent legal advice as to the enforceability of the guarantee and to acknowledge the likely effect on personal assets should the Personal Guarantee be called in.
In the recent case of Nat West vs Alfano and others, the bank’s procedures were meticulous and whilst they had not requested independent legal advice the High Court Judge decided that the guarantor was fully involved in the business and signed a waiver to say they didn’t require legal advice, prior to signing.
Since the case of RBS vs Etridge at the House of Lords in 2001, lenders have been insisting on independent legal advice where the Personal Guarantee relies upon jointly owned assets, particularly where the spouse isn’t a Director of the company receiving funds.
Every week we receive calls from wives of company Directors who have become aware of a Personal Guarantee but have clearly had no prior knowledge. In most cases the business has either entered an insolvency procedure or is due to imminently. For most they are contemplating the loss of their family home for the first time and potentially facing personal bankruptcy, so the fear is very real and highly emotional.
A number have been advised that they have signed the Personal Guarantee but have little or no knowledge of it. There are some that have claimed that they were put under pressure to sign. For all of them the knowledge that they could have taken insurance comes as a bit of a slap in the face. Ultimately the advice is broadly the same. Lenders have a serious desire to protect repayment of their funding in whatever manner they can.
Personal Guarantees have the greatest record of collectability and will be the underwriters preferred choice, particularly for loans that are not secured by debenture. Seeking to rely upon unenforceability is foolhardy and whilst there may be some opportunity to do so it would be likely to require the funding of legal costs which at a point the business is likely to have failed is probably unlikely.
In terms of further impact whilst money is the number one stress factor in marriages bankruptcy is considerably more devastating. In terms of divorce statistics where the current level of just over 100,000 takes account of an overall 50% increase in divorce following bankruptcy.
For many people this is the ultimate failure cost of a business where the family unit suffers most.
There were 18,401 company insolvencies in 2017, compared to 99,196 personal insolvencies in the same period, up 9.4% on 2016 and only a shade below the peak recession figures.
A recent report stated that 70% of the UK’s working population were described as “chronically broke”. If you’ve signed a Personal Guarantee for the business, or you believe your spouse has do so, don’t you owe it to yourself to see how much you can ultimately protect yourself from the loss of your home?
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